Eligible capital property ("ECP")
includes such things as customer lists, franchise rights, licenses,
quotas and other intangibles. ECP also includes goodwill,
which in general terms is the value of a company beyond the value
of its tangible and other specified property.
Initially mentioned in the 2014 Federal Budget, the Federal
Government announced in the 2016 Budget that it is replacing the
current regime for the taxation of ECP with a new capital cost
allowance ("CCA") class and essentially
merging ECP into the depreciable property tax regime. The
proposed changes are slated to come into effect on January 1,
2017. The good news is that the new taxation regime for ECP
should be much simpler. The bad news is that the taxation of
gains realized on a sale of ECP, particularly for
Canadian-controlled private corporations
("CCPC") will be much less
In basic terms, the current taxation regime is such that on a
sale of ECP by a CCPC the gain is included in general income at a
rate of 50%. The other 50% is added to the corporation's
capital dividend account, which may be distributed to shareholders
via tax-free capital dividends. Using general corporate tax
rates in British Columbia, Alberta, Quebec and Ontario, this
results in an effective corporate tax rate for gains on the sale of
ECP by a CCPC of about 13% (slightly higher in Ontario and
The new rules will treat gains on the sale of ECP as investment
income (rather than general corporate income), namely capital
gains, resulting in an effective corporate tax rate for gains on
the sale of ECP by a CCPC in the aforementioned provinces of about
25%. In other words, a CCPC will initially pay almost twice
as much tax on a gain from the sale of ECP in 2017 than it will in
2016. A portion of this higher tax under the new rules
will be refundable, but in order to obtain a refund the CCPC will
have to pay taxable dividends to its shareholders.
Consequently, the tax deferral available under the old regime has
been effectively eliminated upon the new rules coming into
For a corporation that is considering selling goodwill or other
ECP in the near future as part of a sale of assets (the issues
outlined in this article are inapplicable to share sales),
consideration should be given to selling prior to the new rules
coming into effect. Should that prove impractical, the
corporation could also consider reorganizing in 2016 to crystalize
unrealized gains in respect of ECP, in particular goodwill, thereby
accelerating tax payable but locking in the lower rate. If it
is presently unclear whether it makes sense to reorganize the
corporation to crystalize unrealized gains in respect of ECP in
2016, it may be possible to defer the decision for a time yet
maintain the ability of the corporation to benefit from the 2016
taxation regime for ECP.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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